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Spacex and Tesla CEO Elon Musk has been trying to get to the bottom of what happened with the popular trading app Robinhood when it stopped people from buying shares of hot stocks, like Gamestop. The shares of these stocks became popular due to the Wallstreetbets movement.
Elon Musk Says People Want the Truth From Robinhood
During an interview on The Good Time Show via the Clubhouse app Sunday night, Elon Musk grilled the CEO of trading app Robinhood, Vlad Tenev, over the companyâs decision to restrict hot stocks last week, including Gamestop. On Friday, Robinhood also restricted crypto trading, citing âextraordinary market conditions.â
âWhat happened last week? Why canât people buy the Gamestop shares? The people demand an answer and they want to know the details and the truth,â Musk said.
Tenev began by explaining the structure of his company. âRobinhood is actually a couple of companies,â he described. Robinhood Financial processes trades, Robinhood Securities clears and settles the trades, and Robinhood Crypto which deals with crypto trades.
The Robinhood CEO detailed that last Wednesday, his platform experienced âunprecedented volumeâ as âa lot of these so-called meme stocks were going viral on social media and people were joining Robinhoodâ to buy these stocks. Consequently, the company âreceived a fileâ from the National Securities Clearing Corporation (NSCC) Thursday morning at about 3:30 AM PST. It requested Robinhood to âput up money to the NSCC based on some factors,â including the volatility of certain securities. Tenev clarified that âthis is the equities business so itâs based on stock trading and not options trading or anything else,â elaborating:
They gave us a file with a deposit and the request was around $3 billion dollars which is about an order of magnitude more than what it typically is.
Musk interrupted Tenev, questioning: âWhy is that so high? It sounds like this is an unprecedented increase in demand for capital. What formula did they use to calculate that?â
Tenev replied: âWe donât have the full details. Itâs a little bit of an opaque formula but thereâs a component called the VAR of it, which is the Value at Risk, and thatâs based on kind of some fairly quantitative things ⊠and then thereâs a special component which is discretionary so that kind of acts as a multiplier.â Tenev also noted that up until that point, his company âhas raised a little bit around two billion dollars in total venture capital,â so the request was âa big number.â
The Tesla CEO interrupted again, asking: âWhat everyone wants to know is did something maybe shady go down here? It seems weird that youâd get a sudden $10 billion demand in the morning ⊠suddenly out of nowhere.â Tenev swiftly corrected Musk that the number was $3 billion. The Robinhood CEO then emphasized:
I wouldnât impugn shadiness to it or anything like that, and actually the NSCC was reasonable subsequent to this. They worked with us to actually lower it. It was unprecedented activity.
Musk abruptly asked Tenev: âIs there anyone holding you hostage right now?â Tenev chuckled and replied: âNo, no, Iâm okay. Thanks for asking.â Both laughed.
The Robinhood CEO proceeded to explain what happened, calling the experience ânerve-wrecking.â He said after receiving the request for $3 billion, his chief operating officer called up someone higher up at the NSCC to discuss what to do. âThere was another call and they lowered it to something like $1.4 billion from $3 billion,â Tenev reiterated that it was still a high number. His company then proposed a plan to the NSCC of âmarking these volatile stocks that were kind of driving the activity position-closing only.â
Then, at about 5 to 5:30 AM PST, before the market opened, the NSCC came back and reduced the deposit requirement to $700 million, âwhich we then deposited and paid promptly,â Tenev emphasized. Acknowledging that the move was bad for customers, the Robinhood CEO said, âWe had no choice, in this case. We had to conform to our regulatory capital requirements and so the team did what they could to make sure we were available for customers.â
The Spacex CEO further questioned: âWho controls this organization, this clearinghouse?â Tenev replied: âItâs a consortium. Itâs not quite a government agency. I donât really know the details of all of that.â Nonetheless, he emphasized that âTo be fair ⊠I think there was legitimate sort of turmoil in the markets ⊠so there probably is some amount of extra risk in the system that warrants higher requirements so itâs not entirely unreasonable.â He noted that lots of other brokers were in the same situation and had to restrict the same activity.
âSo it sounds like this organization calls you up and they basically have a gun to your head: either hand over this money or else,â the Spacex CEO summarized, elaborating:
Basically, what people are wondering is did you sell your clients down the river or did you have no choice. If you had no choice, thatâs understandable but then we got to find out why you had no choice and who are these people that are saying you have no choice.
âI think thatâs fair. We have to comply with these requirements. Financial institutions have requirements,â Tenev responded. Nonetheless, he suggested that it would be helpful to know the formula the NSCC uses to calculate these requirements so companies can plan better.
Musk proceeded to ask about whether there was outside pressure forcing Robinhood to take the action it did. Tenev affirmed that there is âa rumor that Citadel or other market makers kind of pressured us into doing this.â However, he clarified, âthatâs just false,â emphasizing that âthis was a clearinghouse decision and it was just based on the capital requirements so from our perspective Citadel and other market makers werenât involved in that.â
During the same Clubhouse interview, Elon also revealed that he is a supporter of bitcoin and should have bought the cryptocurrency eight years ago. He believes that bitcoin is on the verge of getting broad acceptance by traditional finance people. On Monday, Robinhood raised another $2.4 billion from shareholders after it secured $1 billion last Thursday.
What do you think about the Robinhood CEOâs explanation? Let us know in the comments section below.
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